Debt Collectors Cleared to Avoid Liability by Buying Out Claims

Can a debt collector accused of crossing the line avoid liability by buying a consumer’s legal claim out from under her?

A federal judge in Las Vegas said yes. The case deserves attention because if the U.S. Court of Appeals in San Francisco affirms the judge’s ruling, you can be sure that more debt collectors will attempt this counter-intuitive maneuver to shield themselves from federal liability.

In March 2015, Patricia Arellano of Las Vegas received a notice from Clark County Collection Service (CCCS), a private debt collector seeking $370 in overdue medical bills. Arellano didn’t respond. CCCS went to court and obtained a default judgment against her. The bill grew to about $800, with costs and fees.

Next, Arellano sued CCCS under the federal Fair Debt Collection Practices Act. She alleged that the company had been misleading about how much time she had to fight the collection effort. She also alleged that CCCS’s name illegally implied that it was affiliated with the government of Clark County, Nev., when in fact it is not.

Then came the really weird twist. Seeking to enforce its judgment, CCCS obtained a “writ of execution” under which the sheriff of Clark County was obliged to sell off Arellano’s property. But not just her physical property—the writ also covered her pending legal claim against CCCS. In an auction held last November on the steps of the Clark County courthouse, Arellano’s claim against CCCS under the Fair Debt Collection Practices Act was sold for $250. The buyer? None other than CCCS.

A few months later, CCCS asked a federal judge to dismiss the fair-debt collection claim on the theory that CCCS didn’t want to sue itself. Arellano opposed the motion. U.S. District Judge Jennifer Dorsey noted that the case “presented an interesting situation” and then ruled for CCCS, effectively killing Arellano’s lawsuit. The hearing took 11 minutes.

A nationally known appellate law expert has parachuted into the case to represent Arellano. Washington-based Deepak Gupta argues that the series of events tolerated in this case undermine the purpose of the federal fair-debt collection law.

“The FDCPA is meant to accomplish its goals through a nationwide scheme of private enforcement; victims of debt-collection abuses may bring suit, and win statutory damages, to deter future violations,” Gupta argued in his brief. “But if CCCS gets its way, that system would crumble.”

CCCS hasn’t responded to an email asking for comment on the case.

Copyright 2018 Bloomberg.

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